Heatwave and World Cup give the economy a temporary shot in the arm

Both official and survey data show that growth momentum has picked up a little over Q3 so far. However, temporary factors such as the World Cup and the warmer weather are supporting growth and are likely to fade into August and September. Further ahead, momentum is likely to remain more subdued.

ONS data suggests that the economy picked up a little more steam in the three months to July, with GDP growth edging higher to 0.6%. Much of the pick-up was driven by broad-based growth in the services sector. A notable turnaround occurred in the hotels, bars and restaurant sector which posted the first quarter on quarter growth in four months (0.8%), likely reflecting a combination of good weather and the World Cup boosting output. Supporting this, retail trade also grew strongly. Construction output also picked up, with quarterly growth the strongest in 18 months. Nevertheless, this mostly reflected strong growth in May, which was likely due to catch-up from output lost to the snow in Q1.

Business surveys corroborate firmer growth momentum over Q3 to date. The CBI’s growth indicator, published in August, suggests a further increase in growth in the three months to August, after solid growth in July. The IHS Markit/CIPS composite PMI also suggests that growth momentum has improved after a softer July reading. The stronger composite PMI was driven by the service sector with the reading improving to above average in August as service providers linked this to resilient business and consumer demand. The manufacturing PMI reported slightly slower growth in August, as growth in new orders eased to its weakest in just over two years. Nevertheless, a divergence has opened up between weaker official data and stronger survey data (both CBI data and the PMIs), making an assessment of underlying conditions in the sector more difficult. Meanwhile construction growth eased in August to the weakest since May, but remained above the no-change 50 mark signalling a moderate overall rise in construction output.

Taken together, the data so far suggests that Q3 has gotten off to a decent start, but it is unclear whether this stronger momentum will continue. A number of temporary factors are supporting growth – good weather, the World Cup and residual catch-up from a weak Q1 – are likely to have faded in August and September. Therefore, momentum for the remainder of this year is likely to be more subdued, in line with the CBI’s economic forecast which predicts growth of 1.4% for 2018.